Asia yet to shine but Smith earns points
It was the right message to send to shareholders at a time when the market had turned its back on growth stocks in favour of yield stocks. The bank's results are a good indication of what to expect when Westpac reports its results on Friday and National Australia Bank next week - lacklustre credit growth, offset by cuts to the expense line and juicy fat dividends.
Australian banks have always paid decent dividend yields, hence their outperformance on the stockmarket in the past year, but ANZ's decision on Tuesday to move it up a notch by lifting the dividend payment by 11 per cent put a rocket under its share price.
By the close of trade ANZ's shares were trading at close to a six-year high, up almost 6 per cent on the day, and putting it on a market capitalisation of more than $87 billion.
In the case of NAB, the expectation is its Australian business will do well but the overall result will again be affected by the albatross that continues to sit around its neck: the UK business. Despite this, it wouldn't surprise if Cameron Clyne, as NAB's latest version of the Ancient Mariner, tries to improve his position in the approval rating index by lifting dividends.
ANZ lifted dividends 11 per cent, putting it on track for a dividend payout of 69 per cent for the full year.
For the six months to March 31, ANZ's cash profit jumped 10 per cent to $3.18 billion despite lacklustre credit income growth. Most of the increase came from ANZ's global markets business, namely foreign exchange and fixed-interest plays, and a cut to its expense line.
To put it into context, the bank generated total operating income of $9 billion and its global market business contributed $1.1 billion of that, compared with $900 million in the previous six months.
But in terms of Smith's Asian strategy and his ambition to earn up to a quarter of its profits from the region within the next five years, it is hard to see how.
Cash profit from the Asia Pacific, Europe and America (APEA) region came in at $460 million, up 3 per cent from the previous corresponding period and down 11 per cent in the previous six months. This makes its New Zealand operations a bigger contributor to overall earnings.
Asia's contribution to the APEA profit was $301 million, which represents less than 10 per cent of the bank's total earnings. The brutal reality is Smith's Asian growth strategy, which he launched years ago, has been a drag on the bank's overall return on equity of 15 per cent, which makes it a depressing influence on the group's share price.
The big question for all the big four banks is what next for growth? ANZ's expansion into Asia appears to have a few flaws, NAB's foray into the UK has been a disaster, Westpac is hoping its resuscitation of the Bank of Melbourne brand works and Commonwealth Bank has its tentacles in wealth management.
Despite the seeming inability to get the ANZ Asian growth story to take shape and get the full imprimatur of investors, its ability to take the knife to costs scored a lot of points. ANZ spends about $1.5 billion on wages every six months. By sacking people it was able to boost profit significantly.
Put simply, a reduction in headcount produced 22 per cent of the increase in profit from the first half of 2012 to the first half of 2013.
While improving efficiency is an admirable trait that is rewarded by shareholders, the greater prize is to grow the Asian business with a return on equity that will push the share price higher rather than anchor it to the success of the Australian business. This is the task of a visionary leader.
Frequently Asked Questions about this Article…
ANZ’s shares rose after the bank lifted its dividend by 11%, delivered double‑digit earnings and cut costs. Cash profit for the six months to March 31 jumped 10% to $3.18 billion, and the dividend move pushed the share price to near a six‑year high (up about 6% that day) and a market capitalisation above $87 billion.
ANZ lifted its dividend payment by 11% and said this puts it on track for a full‑year dividend payout ratio of about 69%, making the bank more attractive to yield‑focused investors.
Most of the recent increase came from ANZ’s global markets business (foreign exchange and fixed‑interest), which contributed $1.1 billion of total operating income. Credit income growth was described as lacklustre, so markets and expense cuts drove the uplift.
Not yet. Cash profit from the Asia, Pacific, Europe and America (APEA) region was $460 million (up 3% year‑on‑year but down 11% on the prior six months), and Asia’s contribution was $301 million — less than 10% of ANZ’s total earnings. The article notes the Asian strategy has so far dragged on the group’s return on equity (about 15%).
Cost cuts made a material difference: ANZ spends roughly $1.5 billion on wages every six months, and the bank said reductions in headcount accounted for about 22% of the profit increase from the first half of 2012 to the first half of 2013.
The article suggests a similar pattern across the big four: lacklustre credit growth offset by expense cuts and attractive dividends. NAB’s Australian business is expected to perform well but its UK operations remain a drag, Westpac is focusing on reviving the Bank of Melbourne brand, and Commonwealth Bank leans on wealth management.
Overseas expansion can take time and may depress returns if it doesn’t quickly produce profits. The ANZ example shows Asia has contributed only a small portion of earnings so far, so investors should be cautious and watch how much overseas units actually add to group profit and return on equity.
Watch dividend yield and payout ratio, cash profit, credit growth trends, operating income from global markets, APEA or overseas profit contributions, expense cuts or headcount changes, and return on equity — these indicators help show whether growth or efficiency is driving earnings.
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